Federal Reserve Board invites public comment on framework that would more closely match regulations for large banking organizations with their risk profiles

The Federal Reserve Board on Wednesday invited public comment on a framework that would more closely match the regulations for large banking organizations with their risk profiles. The changes would reduce compliance requirements for firms with less risk while maintaining more stringent requirements for firms with more risk.

The framework establishes four categories of standards for large banking organizations–those with more than $100 billion in total consolidated assets. The proposals build on the Board’s existing tailoring of its rules and would be consistent with changes from the Economic Growth, Regulatory Reform, and Consumer Protection Act.

“The proposals would prescribe materially less stringent requirements on firms with less risk, while maintaining the most stringent requirements for firms that pose the greatest risks to the financial system and our economy,” Chairman Jerome H. Powell said.

The changes would significantly reduce regulatory compliance requirements for firms in the lowest risk category, modestly reduce requirements for firms in the next lowest risk category, and largely keep existing requirements in place for the largest and most complex firms in the highest risk categories.

“With these proposals, banking organizations will see reduced regulatory complexity and easier compliance with no material decline in the strength of the U.S. banking system,” Vice Chairman for Supervision Randal K. Quarles said.

Firms would be sorted into categories based on several factors, including asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. Each factor reflects greater complexity and risk to a banking organization, resulting in greater risk to the financial system and broader economy.

Firms in the lowest risk category–generally most domestic firms with $100 billion to $250 billion in total consolidated assets–would no longer be subject to standardized liquidity requirements. They would remain subject to firm-developed liquidity stress tests and regulatory liquidity risk management standards. Additionally, these firms would no longer be required to conduct company-run stress tests, and their supervisory stress tests would be moved to a two-year cycle, rather than annual. These reduced requirements would reflect the lower risk profile of these firms.

Firms in the next lowest risk category–generally those with $250 billion or more in total consolidated assets, or material levels of the other risk factors, that are not global systemically important banking organizations (GSIBs)–would have their standardized liquidity requirements reduced to reflect their more stable funding profile but remain subject to a range of enhanced liquidity standards. In addition, the firms would be required to conduct company-run stress tests on a two-year cycle, rather than semi-annually. The firms would remain subject to annual supervisory stress tests.

Firms in the highest risk categories–including the GSIBs–would not see any changes to their capital or liquidity requirements.

Taken together, the Board estimates that the changes would result in a 0.6 percent decrease in required capital and a reduction of 2.5 percent of liquid assets for all U.S. banking firms with assets of $100 billion or more.

The regulatory capital and liquidity aspects of the proposals were jointly developed with the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency. A separate tailoring proposal affecting foreign banks will be released in the future.

The attached chart shows the proposed requirements for each category, as well as a list of firms projected to be included in each category. Comments will be accepted through January 22, 2019.